7 New Year’s resolutions for the long term investor: Don’t panic

4 Jan 2017

Anet Ahern, CEO, PSG Asset Management

Last year was a particularly trying one for investors. But while many of us look to the markets when it comes to achieving better investment outcomes, managing our own behaviour better often makes the biggest difference. Research has proven time and again that markets earn better returns than the average investor. The difference is due to investor behaviour that destroys value.

Focusing on the long term can help you avoid costly mistakes driven by emotions such as greed and fear and help you to achieve better outcomes.

Below are 7 New Year’s resolutions we believe will help you to do just that.

I will not panic about daily market fluctuations. They are hard to process and inconsequential in the long run when seen individually. For example, on average, the S&P 500 index sees more positive days than negative ones. Since 1950, this equity index has delivered “up” days 53.6% of the time and “down” days 46.4% of the time. Over this period, the S&P 500 delivered a total annual return of 11% p.a. Even though 2016 was a particularly trying year for investors, it still delivered “up” days 58% of the time (as at time of writing, source: Bloomberg). The SA markets as a whole are slightly down year to date, but there are SA equity funds that managed to get returns of over 25% over the past year. One can see that fixating on short term movements can lead to missing out.

I will use the daily news as dinner conversation and not as an investment decision tool. It is journalists’ job to fill newspapers, magazines and websites with news that attracts readers. Human nature draws us to the boldest headlines and we all suffer from confirmation bias (the tendency to focus on news that supports our views). This behaviour helps to drive the bear and bull cycles of the market: when markets are down, investors will often disregard good news, while in the bull phase investors will disregard warning signals and continue to drive markets higher. Newspapers and markets trade on sentiment – but that doesn’t mean you have to.

I will not subscribe to yet another market feed. More news is not necessarily better – nor will it add meaningfully to your knowledge. Focus on a few reliable and credible sources that provide you with a good overview of the market and trust the judgement of professionals like your financial adviser and portfolio manager.

I will remind myself that a share price is an opinion of what a company is worth, and no more. As such where that price came from is irrelevant to where it is going. Ask yourself what a company is worth now, given what we know. Emotional attachment can lead to costly mistakes.

I will always remember that market prices overreact both on the upside and the downside of the environment. And therein lies the opportunity for the rational, long term investor.

I will remember that at 10% growth per annum my investment will double in 7 years, and at 15% it will do so in five. The difference buys me two more years of saving. Sticking with a good fund manager will bring the two closer together.

When I’m tempted to worry about the future, I will focus on the things I know will not change. These include the power of compounding, the importance of diversification, and the impact of skill. By focusing on your long-term investment plan and remembering how market forces can work in your favour even in volatile times, you will be better equipped to ride out the storm.